The Driving Force Behind the Aussie Economy’s ‘Financialisation’

Markets continue to backtrack ahead of the US employment numbers due out on Friday. The Dow and S&P 500 were down 0.29% and 0.24% respectively overnight, while West Texas crude fell by a hefty 3.2%. Gold was down a few bucks too, closing the US session around US$1,308 per ounce.

Following last week’s central banker symposium at Jackson Hole, the Fed appears to have successfully spooked markets into thinking that a rate rise in September is almost entirely dependent on strong employment figures on Friday.

For this reason, investors can’t see beyond the week. The consensus is that employment gains for August will come in at 180,000. A number around or below this suggests rates will stay on hold at the September meeting. Anything well above it puts a lot of pressure on the Fed to move quickly.

The fact that this year’s September meeting occurs just prior to a presidential election adds another layer of uncertainty. For me at least, this suggests that a typically reticent Fed will need a fairly big excuse to raise interest rates next month.

But what would I know? I’m no Fed watcher. At least, that’s my perception. But who am I kidding? We’re all Fed watchers now!

That’s right. Whether you like it or not, central banks have imposed themselves on the investment landscape. They will be around for some time. It doesn’t matter whether you think they are idiots. It doesn’t matter whether you think they have no bearing on a company’s underlying value.

What matters is that everyone else thinks that central banks influence the market. And that being the case, in reality, they do just that!

Fundamentals only play a bit part these days. Everyone knows that, in the short term, it’s all about central banks and their pronouncements. Fundamentals might win out in the long term, but that’s not a comforting thought because central bankers have screwed things up so much I hope the long term never eventuates!

It will, of course. But when?

Sorry, I’m of no help on this matter. I don’t know. And anyone who says they do is lying.

All we can do is look for clues. One of the best sleuths around on this front is Jim Rickards. He begins his latest issue of Strategic Intelligence with the following:

‘The next six weeks could mark one of the most significant transformations in the international monetary system in over 30 years.’

Rickards goes on to list three separate events that take place in September and early October which could transform the global monetary system. In deference to subscribers of Strategic Intelligence, I won’t reveal the events here.

Suffice it to say, these events will likely fly under the radar at the time. And the mainstream media won’t join the dots. But, according to Jim, they will have major implications.

Australia’s Jobs Market

Moving closer to home, this headline from Bloomberg caught my eye this morning:

If You Think Australia’s Jobs Market Looks Healthy, Look Again

‘The strength of Australia’s jobs market is being overstated by a surge in casual positions and an inability by workers to secure more hours.

‘While the unemployment rate fell to 5.7 percent in July from 6.3 percent a year earlier, 87 percent of the jobs created in that period were part-time: a definition that covers anything from 1 hour a week to 35 hours. At the same time, the underemployment rate is stuck near a record high of 8.5 percent.’

‘The changing [labour] market reflects more jobs generated in services industries — which rely less on full-time employees — amid the waning of a mining-investment boom. The resulting lift in part-time jobs, along with a rise in underemployment, has seen a sharp slowdown in wage growth. The flow-on effect: weak inflation that spurred the Reserve Bank of Australia to cut rates to a record-low 1.5 percent last month.’

These numbers reflect the increasing ‘financialisation’ of the Aussie economy. The same thing happened to the US economy during its epic housing boom throughout the early 2000s.

That is, the economy is now driven by debt accumulation and the associated asset price appreciation that goes with it. The beneficiaries of this increase in debt-fuelled ‘wealth’ tend to spend money on services — things like holidays, casual eating, drinking coffee and wealth management services.

And the employment structure of the Aussie economy reflects this more and more. We’re a nation of part-timers.

And I can see the RBA scratching its head, wondering why low interest rates aren’t working and thinking they may need to do more.

Yet it’s as clear as day that low interest rates are the problem. Low rates are the driving force behind the economy’s financialisation. They’re the driving force behind increasing debt and rising asset prices, which, in turn, lead to increasing consumption in low value added services.

Is it any wonder there is no wages growth? It’s because the economy isn’t creating enough highly skilled jobs.

And where is the incentive to create these jobs? The average Aussie’s wealth creation plan involves borrowing a big lick of money, buying a property, and waiting for the land price to appreciate. The real entrepreneurs knock down existing structures and build cheap townhouses or apartments.

But, given housing construction is nearing a cyclical peak, it begs the question: What is next for the Aussie economy?

Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market.
To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

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